One of the hallmarks of prudent discretionary management, and in particular our own philosophy of portfolio management is matching the optimal investing strategy with prevailing risks and opportunities.
Two common approaches to investment management are Active and Passive investing.
Active investing is generally a more dynamic approach to investing. Key attributes of Active investing are:
Portfolios are re-balanced (adjusted to maintain optimal weightings) as often as necessary.
Asset allocation between Stocks, Bonds, and Cash weightings will shift depending on the strategic market outlook.
Buying or selling of stocks and bonds occurs as opportunities arise.
- Defensive portfolio allocations can increase when markets conditions warrant.
Passive investing involves a static policy reflected in infrequent changes to the portfolio asset allocations and holdings. Key attributes of Passive Investing are:
Implicitly assumes that the market continually goes up over the long term – which history has shown is not necessarily true.
Portfolios are set based on a “long-term” optimal mix and are not proactively adjusted to reflect impending market risks.
Asset allocation between Stocks, Bonds, and Cash stay in their proportional weightings for long periods of time.
- Passive investing is often championed by much of the financial services industry.
Deciding when to use the optimal approach
We believe certain times call for a passive investment strategy, whereas in other times an active approach is more prudent.
In the 1980s and 1990s, the market rose steadily for two decades, partially as a result of:
Falling interest rates
Baby Boomers entering the workforce and their prime spending years
Globalization, which helped keep the cost of living low, as goods were made cheaply overseas.
- The advent of the Internet Age
During this time, a prudent investment strategy was to be passively invested in the market using a “buy-and-hold” approach with minimal trading, and through low-cost investment vehicles.
In the last decade, however, market movements have been dramatically different than what we have seen in history and the “buy-and-hold” mantra has proven not to work in all environments. In today’s market we believe that an active and opportunistic trading strategy to be most prudent.
At the core of our active investment process is an understanding of the influence of the behavioural aspects of markets:
At times of extreme investor exuberance, risky assets are priced for perfection and we are then encouraged to reduce our exposure to them.
Conversely, extreme investor fear leads to assets being priced at “fire sale” valuations and we are encouraged to prudently purchase quality assets at “cheap” levels.
As the market’s long-term growth trend re-emerges, we advocate returning to a more passive investment strategy which focuses on capturing the rising tide of the markets.
We believe this strategy best aligns with our clients’ objectives of growing and preserving their wealth.